US firms upbeat despite trade uncertainties: Fed

Trade uncertainties continue to cast a shadow on US businesses, but firms remain largely upbeat even amid a labor shortage that has forced more to raise wages, the Federal Reserve survey said Wednesday.

Trade uncertainties continue to cast a shadow on US businesses, but firms remain largely upbeat even amid a labor shortage that has forced more to raise wages, the Federal Reserve survey said Wednesday.

Labor shortages have been a growing concern for many months, at all skill levels and across many industries, but now are prompting US firms to take extraordinary steps and even turn away business, according to the Fed's "beige book" survey of the economy.

As President Donald Trump pursues a multi-front trade battle that has the United States at odds with allies like the European Union, as well as economic adversaries like China, business contacts and farmers continue to worry about the backlash, including a hit to exports and rising prices of key goods like steel and aluminum.

"Contacts noted some concern about the uncertainty of international trade policy," the Fed said in summarizing the survey, somewhat bland language given the potential impact.

The White House on Tuesday said it was going ahead with 25 percent tariffs on $50 billion in Chinese high-tech goods, despite announcing last week that the trade spat was "on hold" while negotiations were underway.

Commerce Secretary Wilbur Ross was due to travel to Beijing on Wednesday for another round of talks to head off a tit-for-tat trade war.

But steep US tariffs on steel and aluminum imports imposed in March already have provoked price increases which raised concerns among US manufacturers, according to the survey, prepared in advance of the Fed's June 12-13 monetary policy meeting.

And the situation could worsen if US and EU officials fail to reach an agreement that would extend the temporary exemption from the tariffs for European producers which expires June 1.

Upbeat on the economy

Even so, "Economic activity expanded moderately in late April and early May," and businesses are "generally upbeat" about growth in the near term, the 12 Federal Reserve districts reported.

But labor shortages are widespread and reported in every district. And while wage increases so far have been mostly modest, they are now reported nationwide and are beginning to impact prices.

"Many firms responded to talent shortages by increasing wages as well as the generosity of their compensation packages," the survey said.

The San Francisco Federal Reserve Bank said firms have increased compensation packages "to compete with companies trying to poach well-trained employees," and are working with colleges and trade schools to generate a pipeline of potential workers

Dallas said companies are rehiring retired employees to fill the gaps, while St. Louis said some firms "have begun relaxing drug testing and reducing restrictions on hiring convicted felons in order to alleviate labor shortages."

In Richmond, the shortage of truck drivers led transportation firms to turn away business -- even after quadrupling rates for some customers -- forcing more shippers to turn to rail transit.

The central bank keeps a close watch on the labor market and wages since those could feed into inflation, which has been showing tentative signs of accelerating after finally get close to the Fed's two percent target.

The Fed is widely expected to raise its benchmark lending rate in mid-June for the second time this year, with another one or two hikes expected in 2018 as it tries to guide the economy on a path of continued growth without letting inflation accelerate.

Markets are watching for signs the central bank might be forced to move more aggressively to contain prices, but the Fed signaled clearly that it was willing to tolerate an inflation right slightly above two percent for a short period.